Timing in trading, and in life, is rarely perfect. Take, for example, my family: Approximately six weeks ago we started a major kitchen remodeling that involved blowing up our current kitchen and moving the laundry room upstairs. This was no easy project but with the kids at school all day, and in sports after school, we really don’t spend tons of time roaming the house and mostly stick to our respective offices during the work day.
Fast forward a couple weeks and we are in the midst of a global pandemic! Our home is a construction site, the kids are at home all day every day, and 10 workers are in our house from 7:30 a.m. until 5 p.m. In essence, the Mintz family is locked in our house, while work crews come in and out. It’s far from an ideal situation in the age of coronavirus.
I compare working with kids at home with kitchen renovations going on to juggling with chainsaws, while blindfolded, on a tightrope, with an unseen virus possibly floating around our hallways and on our handrails, light switches and door handles.
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Our timing on this project could NOT have been worse!
Finally, however, the project is done, and as of now no member of my family caught the coronavirus (knocking on the largest piece of wood I can find)!
Somewhat similarly, the stock market and the global economy have been going through a complete nightmare as global economic activity has grinded to a halt. This, along with the unknown of when it will re-start, caused the S&P 500 to fall nearly 35% in just over a month.
Since the lows in late March the market has bounced back nearly 15%, which has caused many to ask, “Is the 2020 bear market over?”
First off, let me be clear: The coronavirus pandemic is an unprecedented situation. And because of that, NO one knows how it will play out. Warren Buffett doesn’t know. Neither does Carl Icahn, Bill Ackman or any other famous investor you could name. In fact, if you listened to enough of these famed traders you would likely get a 50/50 split on their opinions as to whether the market is headed higher or lower.
That being said, for the time being (subject to change very quickly) I do think market conditions are improving. Here is some of what I mean:
Signs the 2020 Bear Market May Be Over
The Chicago Board of Options Volatility Index (VIX), also known as the Fear Index, has dropped from 75 to 45, which is like being reduced from the fear of swimming with great white sharks while bleeding to merely swimming in a vicious riptide. Fear is still out there, but not the total panic of a couple weeks ago.
Daily trading activity has become more normalized as last week the S&P 500 “only” averaged a move of 2.6% per day, which is dramatically less than the previous four weeks.
And lastly, my watch list of stocks that are attracting bullish option activity combined with a strong stock chart, which is my best signal for stock strength, has been growing nearly every day since the March 23 bottom.
Lastly, I have been encouraged by the market’s reaction to bad news. Remember, the market and the economy don’t move in tandem. In fact, oftentimes the market sells off months before a recession, and then rebounds before the economy booms. In essence, typically the stock market gets ahead of big economic moves.
A perfect example of this was two weeks ago when the U.S. reported its highest weekly unemployment claim number of all time … QUADRUPLING the second-worst number in history! And how did the market respond? The Dow rose 1,300 points that day as this bad news, which nearly all traders had been expecting, had already been priced in during the previous month’s decline.
That said, despite potentially slowing rates of coronavirus cases this week, clearly we aren’t yet out of the woods in terms of people getting sick and our economy getting back in gear. And because of this, a re-test of the market’s lows could seriously dent the bull case.
However, going forward I would recommend not being too focused on rising virus figures and bad economic data as this is unfortunately expected. Instead, I would limit your focus to the action in leading stocks, as well as option activity, to get a feel for whether the 2020 bear market is over.
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